["Should the contraction from 2011 continue at this pace, annual U.S. retail video game revenue in 2012 could fall below the $12.6 billion figure from 2006," says Gamasutra analyst Matt Matthews in his latest Behind the Numbers column.]

Wedbush Securities analyst Michael Pachter had expected software down 19% at U.S. retail, and Michael Olson of Piper Jaffray and Company had foreseen a 25% decline. Doug Creutz of Cowen and Company was more pessimistic than the consensus, with a 27% decline.

According to the NPD Group's retail sales estimates, the actual decline was a shocking 42%. Console and handheld software sales fell from $503 million last April to a mere $292 million for the same period this year.

I can slice the market however you wish – console and handheld, high def and standard def, hardware and software – but practically everyone took a hit at U.S. game retail.

The only segment that did not suffer was the accessories segment, where the NPD Group records sales of controllers, cases, and points cards. Accessories inched up from $147.8 million last year to $148.6 million this year, a mere 0.5% increase. That's hardly a win in my book.

Before we look separately at the hardware and software segments of the retail market, I want to show just how dire the situation is right now. As the following graph shows, the total amount of revenue generated by the retail video game market in the U.S. is now back below 2007 levels.

Should the contraction from 2011 continue at this pace, annual U.S. retail video game revenue in 2012 could fall below the $12.6 billion figure from 2006, the first full year of Xbox 360 sales and the launch year for the Nintendo Wii and Sony PlayStation 3.

Given how loaded the latter half of the year is, with both software launches and a new console launch, I still consider that event unlikely, but it does give some perspective on where things could go without a turnaround.

Console Blues

The high definition segment of the market had the best hardware news for the month, if I can call it that. According to several analyst comments, it appears that combined sales of Xbox 360 and PlayStation 3 consoles down 18% year-over-year. Microsoft hasn't seen hardware sales that low (on a weekly average basis) since May 2010, nearly two years ago, right before the launch of the current Xbox 360 S model at E3.

As a result of the weakness in hardware, every major console is down this year compared to last year. The figure below demonstrates this for the Xbox 360, PS3, and Wii.

In the face of the persistent declines, Microsoft has signaled its intentions: a $100 Xbox 360 and Kinect system with a two-year Xbox Live Gold service plan. While this deal is currently restricted to fewer than 20 Microsoft Stores in the U.S., I expect this to be just the test phase, with a formal roll out in other retailers later this year. In a conversation about April sales, Wedbush's Pachter called the $100 deal "Microsoft's price cut" and said he didn't anticipate any other price adjustments for Microsoft's systems until closer to the holiday season.

After a disastrous end to its fiscal year, Sony has restated its intentions to strengthen its video game segment and I don't see any way to make progress in that area without increasing its hardware base and driving demand for software and services. Moreover, Sony has estimated it will increase its hardware sales over last fiscal year, and that certainly will not happen without a price cut or some other dramatic change.

Two months ago, I predicted that Sony would move to cut its price in April and that Microsoft would cut its prices shortly thereafter. Clearly I was wrong, and the new pricing plan by Microsoft is one that I did not expect. However, I still think that Sony needs bold moves to grab as much marketshare as it can, and would prefer it to announce a price cut in June at E3. The ongoing discounts and gift card bundles at retailers suggest a cut from $250 to $200, whenever it happens.

Pachter disagrees, and says that the PS3 will get its price cut by September. Certainly history is on his side, as Sony has announced a price cuts in August 2009 and August 2011. Moreover, Sony has shown immense patience all generation while cutting its hardware prices.

On the issue of pricing, I would note that the average price of the Xbox 360 had been declining from about $300 in January to just below $260 in March. In April, with the introduction of the $450 Kinect Star Wars hardware bundle, the average price jumped up to $325, according to data provided to me by the NPD Group. Based on last month's average price, it seems likely to me that 70,000 to 80,000 units of the Kinect Star Wars bundle were sold during April.

The average price of the PS3 in April dropped again, this time to $262, which I believe should be a record low. Without the addition of the Kinect Star Wars sales, I think that the Xbox 360 and PS3 could nearly have been tied for hardware sales in April.

Handheld Weakness

Handheld software also demonstrated significant weakness during April, both for Nintendo and Sony. Of particular concern is Sony's PlayStation Vita (PSV), whose sales fell below 100,000 units for the month. In terms of units per week, I estimate that PSV hardware sold at approximately half the rate it did in March, probably below 20,000 units per week.

(Specific PSV sales information is not available for April, from Sony, the NPD Group, nor from analysts.)

When examining the PSV launch sales data, I expressed a great deal of skepticism about Sony's handheld. Two months on, I have not changed my mind.

It is my estimation that consumers of all stripes now expect handheld devices to have a great selection of software available at launch. The PSV could have been such a device, with the full PSP software catalog available to consumers, but only half of all full-sized U.S. PSP games are available online and not all of them are compatible with the PSV.

Even if the entire PSP catalog were open to PSV owners, the legacy pricing structure for that software on the PlayStation Store is out of step with the pricing of software in the distribution channels serving iOS and Android devices.

The inexpensive software line that Sony launched specifically to appeal to this cost-conscious segment of the market, PSP minis, is still not completely compatible with the PSV in the U.S. On top of that, the PSV still won't run the PlayStation 1 software available on Sony's PlayStation Store, even though the device is clearly powerful enough to do so.

To make matters worse, new titles designed specifically for the PSV are still trickling into retail and the online store. These titles are priced between $20 and $50, with the majority falling in the $30-$40 range.

Truly, Sony is on the right track, building a truly modern software distribution system with what I hope will be a progressive pricing structure. However, just as quickly as they are moving on their own, the rest of the market is advancing independently and Sony could still be left behind, another casualty of the ongoing disruption fostered by insurgents like Apple and Google.

Personally, I'm still trying to make the case for dropping $250 on the PSV for myself, and I'm hard-pressed to make it for anyone else. Just ask Activision Blizzard what it's doing with its money. The system has been out for three months already, and it has not published a single title for it (though it announced Call of Duty for Vita last year at E3).

I'd like to make a very brief comment about the state of Nintendo's older DS line of hardware. At the end of this week the Nintendo DSi and the Nintendo DSi XL will receive price cuts to $100 and $130, respectively. (Presumably there is practically no further Nintendo DS Lite hardware stocked anywhere.)

This situation reminds me of the spring 2009 price cut that Sony's PlayStation 2 received from $130 to $100. That price cut helped prop up sales for the aging console through one more Christmas season, and 12 months later the system's sales essentially fell off a cliff.

The DS price cuts are the final send-off for the record-setting handheld, and I expect by this time next year its contributions to the market will be minuscule. After Christmas, Nintendo will effectively be a single-handheld system company, putting all of portable software efforts into the Nintendo 3DS.

The figure below shows a brief recap of the growth of the Nintendo DS base in the United States, with some notable milestones along the way.

By the end, I expect that the three Nintendo DS models will account for over 53 million units of hardware in the United States.

Later this week, I want to take a closer look at the software market and then – separately – the market outside retail. At retail, I will show data that demonstrates that the U.S. is not alone in seeing breathtaking contraction in software sales and that publishers are themselves partly responsible for the contraction. Outside of retail, I think the latest figures from the NPD Group actually carry some hidden bad news: the digital market may be contracting too.